Dominican Republic: Risk Assessment

Country Risk Rating

A4

A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average. - Source: Coface

Business Climate Rating

C

The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.

Strengths

Leading Caribbean tourist destination

Remittances from its diaspora

Free-Trade agreement with the United States (CAFTA-DR)

Free-Trade Zones (51% of exports)

Political stability

Weaknesses

Dependence on US economy

Dependence on gold prices

Sporadic electricity shortages

Deficiencies in education and health care systems

High levels of poverty and inequality

Drug traffic related crime

Wide-spread corruption

Current Trends

Economic Growth Dependent on the US Economy

Post-Hurricane Maria reconstruction efforts boosted the economy in 2018, but growth is expected to be slower in 2019, although still high. After being driven by the favorable economic situation in the United States in 2018, the country's growth may be affected as the US economy gradually cools. This may impact inflows of tourists, which should nevertheless remain high. Tourism revenues and strong growth in expatriate remittances will act as the drivers for household consumption, which is the main contributor to growth, accounting for 70% of GDP. Relatively healthy economic conditions in the United States should continue to boost exports, and hence sugar and gold production, despite uncertainties about the price of gold. Inward FDI, particularly from the USA, is set to continue thanks to the presence of free zones and strong performances of the construction and tourism sectors. The rising price of oil, of which the country is an importer, should put inflation in the central bank's target zone of 3-5%. Thanks to the country’s comfortable foreign exchange reserves, the central bank is able to pursue a fairly accommodating monetary policy focused on supporting growth and controlling inflation.

Reverse Trajectories for the Twin Deficits, Which Remain Relatively Low

The 2019 budget, which has been presented to and approved by Parliament, shows a slight decrease in the government deficit. The objective is to increase state revenues by 14%, notably via more efficient tax and customs collection and continued strong growth. This increase is expected to slightly exceed the 13% growth in public spending, more than two-thirds of which is made up of current expenditures, chiefly in health and education. Capital expenditure (13% of total expenditure) and debt interest (17%) are the fastest growing areas (14% and 23% respectively), but their share remains significantly lower. The improvement in the budget balance could be much smaller than the one targeted by the government (deficit of 1.7% of GDP) because of possible additional current expenditures (weather-related risk, fight against trafficking) during the year.

The trade deficit, which stands at more than 11% of GDP, is set to widen further in 2019 on higher imported oil prices and a possible decline in gold prices. In addition, past depreciation of the local currency, although good for export competitiveness, is pushing up the price of imports. The balance of services (about 7% of GDP in 2017) will continue to improve and remain strongly positive thanks to tourism, which is expected to grow by almost 5% in annual terms, as will the balance of transfers (slightly above 7% of GDP in 2017), driven by remittances from the diaspora. Due to the many active FDI projects in the country, the income balance will remain very negative. All of this is expected to translate into a slight deterioration in the current account. The current account deficit is expected to be largely financed by FDI supported by the existence of numerous free zones. The latter are growing rapidly and account for nearly 60% of FDI in the Caribbean region.

Apparent Political Stability Masks a Fragile Situation

The political landscape is largely dominated by President Danilo Medina's Partido de la Liberacion Dominica, which holds a majority in both houses of the national legislature. The President will end his second term in 2020. However, although he enjoys good ratings, popular protests are on the rise. Since 2017, Marcha Verde demonstrations have been organized, including one in August 2018 that was attended by nearly a million people, to denounce corruption and call for the conviction of 12 current or former political leaders accused of taking bribes from Odebrecht, a Brazilian company. Taxes on petroleum products coupled with the rise in the price of oil have also fuelled discontent. At the same time, at the end of 2018, the country launched a new border security plan with Haiti to combat arms and drug trafficking and illegal immigration by Haitians, who account for 87% of all immigrants. In addition, the country broke off diplomatic relations with Taiwan in 2018, a move that has led to the opening of a Chinese embassy in Santo Domingo and the development of trade relations, the effects of which should be felt as early as 2019. Chinese investments are expected to increase in a country where the business environment is ranked 102nd in the Doing Business 2019 ranking.